U.S. Treasury Issues Proposed Section 45Q Regulations on Carbon Sequestration Credits
- Sep 30, 2022
- Carbon Capture
- By admin
On May 28, 2020, the U.S. Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) released proposed regulations (Proposed Regulations) relating to the tax credit for sequestration of carbon oxides provided by Section 45Q of the Internal Revenue Code. The Proposed Regulations, while subject to change or revocation until finalized, provide important guidance for operators and investors considering investments in carbon capture and storage technology.
As discussed more fully below, the Proposed Regulations address several important issues on which the statute itself reserved for implementation by the IRS and Treasury or for which commenters requested additional guidance:
- Standard for “Secure Geological Storage.” The Proposed Regulations provide that “secure geological storage” generally can be demonstrated by compliance with the Environmental Protection Agency (EPA) Underground Injection Control regulations applicable to Class II or Class VI injection facilities. For Class II facilities not subject to subpart RR of such regulations, the Proposed Regulations provide an alternative standard that the International Organization for Standardization (ISO) has adopted.
- Recapture of Section 45Q Credits. The Proposed Regulations provide rules requiring the recapture of credits under Section 45Q to the extent captured carbon oxides cease to be captured, disposed of or utilized in a manner permitted by the statute. In this regard, the Proposed Regulations take an approach similar to the approach taken with respect to the recapture of certain investment tax credits.
- Election to Transfer Credits. The Proposed Regulations establish procedures through which the owner of carbon capture equipment can elect to allow one or more offtakers of qualified carbon oxides to claim the Section 45Q credits otherwise available to the owner of the carbon capture equipment.
- Standard for “Contractually Ensuring” Disposal, Injection or Utilization. For owners of carbon capture equipment that do not physically dispose of, inject or utilize the captured carbon oxides themselves, but instead contractually ensure such disposal, injection or utilization, the Proposed Regulations provide guidance regarding what is necessary to “contractually ensure” such disposal, injection or utilization.
The Proposed Regulations state that taxpayers may rely on them, until final regulations are published, for taxable years beginning on or after February 9, 2018. Comments to the Proposed Regulations may be submitted until August 3, 2020.
A brief summary of Section 45Q is included below, followed by a more detailed summary of the Proposed Regulations.
Background on Section 45Q
Section 45Q generally allows a tax credit (Section 45Q Credit) equal to a specified dollar amount per metric ton of qualified carbon oxide captured using carbon capture equipment during the year and either (i) disposed of in “secure geological storage” without being utilized for any other purpose, (ii) used as a tertiary injectant in an enhanced oil or natural gas recovery project and then disposed of in secure geological storage or (iii) otherwise utilized in another manner permitted by Section 45Q (e.g., fixation through photosynthesis or chemosynthesis). The specified dollar amount used in determining the amount of the Section 45Q Credit is materially higher if the captured carbon oxide is disposed of in secure geological storage without being utilized for any other purpose.
To qualify for the Section 45Q Credit, carbon oxide must be captured at a qualified facility, which is defined to include any industrial facility or direct air capture facility capturing a specified amount of carbon oxide per year (which amount varies by type of facility), but only to the extent that construction of such facility begins before January 1, 2024 and certain other requirements are met. On March 9, 2020, the IRS and Treasury issued Notice 2020-12, which provides guidance on determining when construction has begun for purposes of the beginning of construction requirement. That same day, the IRS and Treasury issued Revenue Procedure 2020-12, providing a safe harbor for partnership allocations of the Section 45Q Credit.1
The statute directs the IRS and Treasury to promulgate regulations with regard to certain matters relating to Section 45Q. These matters include defining secure geological storage, recapture of credits previously taken, elections allowing carbon capturers to transfer the credit to offtakers of carbon oxides and the standards for determining permissible utilization of carbon oxides (other than as a tertiary injectant).